Econ 104 Final Review

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Which of the following are reasons that banks are so heavily regulated?

Governments are concerned about the safety of deposits, The industry is a principal determinant of aggregate demand, Bank failures are contagious

Bankers' business decisions effect the money supply because bankers

have the ability to create money.

A bank run involves a large flow of money

out of depositors' accounts.

In order for barter trades to occur, there must be a

double coincidence of wants

The "efficiency of the payments mechanism" refers to

the ease and speed of exchanging money for goods and services.

7. Money is an imperfect store of value when

the rate of inflation is high.

8. Liquidity refers to the

ease with which an asset can be converted into cash.

9. Fiat money is

only backed by government decree.

10. The primary feature of money is that it serves as

a medium of exchange.

11. Currently in the United States, money is backed by

everyone's willingness to accept it.

12. The new $20 bills are being introduced by the U.S. Treasury primarily to diminish

counterfeiting.

13. The official definition of the money supply that includes coins, paper money, travelers' checks, conventional checking accounts, and other checkable deposits at banks and savings institutions is called ____.

M1

14. Electronic cash or E-cards are

not included in the definition of the money supply.

15."Near monies" are

liquid assets that are close substitutes for money.

16.One difference between the assets included in M1 and those added to calculate M2 is that items in M1 are

more liquid than those added to compute M2.

17. Which of the following is included in M1?

travelers' checks

18. The M2 definition of the money supply is based on the concept that

many types of deposits can be used as both payments and stores of value.

19. Are "smart cards" or E-cash cards part of the money supply?

No, because they are merely means to transfer checking deposits.

20. Due to new methods of electronically transferring assets from savings accounts to checking accounts, many economists favor moving savings accounts from

M2 into M1.

21. Under fractional banking, when a bank lends to a customer

the money supply increases.

22. Bank regulators are concerned about the safety of depositors because

bank failures were common throughout most of U.S. history and have even occurred in recent decades,in the absence of federal insurance, depositors would lose their money if a bank failed, in the absence of federal insurance, depositors would lose their money if a bank failed, nervous depositors may rush to withdraw their accounts and produce a "run" that could threaten even a sound bank.

23. The objective of bank management is to

strike the appropriate balance between the attraction of bank profits and the need for bank safety.

24. Excess reserves make a bank less vulnerable to runs, but bankers do not like to hold excess reserves because holding excess reserves

means lower profits for banks.

25. If a bank has $1,000,000 in reserves and checking deposits of $3,000,000, what is the bank's reserve position if the required reserve ratio is 20 percent?

The bank has $600,000 of required reserves and $400,000 of excess reserves.

26. The balance sheet of a solvent bank will show

assets = liabilities + net worth.

27. The government banking regulation that places an upper limit on the money supply is

reserve requirements on bank deposits.

28. The required reserve ratio is 10 percent, but banks actually keep 20 percent on reserve. The actual money multiplier will be

5.

29. If people begin to hold more cash, the money multiplier process will

decrease in actual size.

30. The Fed's principal objective is to

manage the money supply and interest rates.

31. The Fed is unlike other central banks in that it

has 12 branches.

32. The actual control of the Federal Reserve System resides in the

Board of Governors.

33. Members of the Board of Governors of the Fed are

appointed by the president for 14-year terms and confirmed by the Senate.

34. When the Federal Reserve System was first established, its founders intended the Fed to

provide protection against financial panics by acting as the lender of last resort.

35. The European Central Bank, established in 1999, was patterned after the

Federal Reserve, founded in 1914.

36. In practice, money supply and short-term interest rates are determined by the

Federal Open Market Committee.

37. The Fed is institutionally independent. A major advantage of this is that monetary policy

is not controlled by politicians.

38. If the Fed buys a T-bill from an individual rather than from a bank, the effect on the money supply is

the same.

39. If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?

It will give the bank new reserves.

The tool most frequently relied on by the Fed is

open market operations.

41. Assume the required reserve ratio is 20 percent and the FOMC orders an open market purchase of $100 million in government securities from member banks. If the oversimplified money multiplier is assumed, then the money supply will

increase by $500 million.

42. When the Fed sells a government security to the public, how does it usually receive payment for the security?

by accepting checks on bank accounts

43. Which of the following will lower interest rates in the short run?

a decrease in real GDP

44. Interest rates rose in the second quarter of 1999. What happened to bond prices during this time?

They decreased.

45. The concept of "lender of last resort" is that when

commercial banks are hesitant to lend, the Fed will step in and increase reserves.

46. The reason that the Fed does not actively use discount rate policy to control the money supply is because the Fed

does not know how banks will respond to discount rate changes.

47. Which of the following will increase interest rates in the short run?

open market sales by the Fed

48. If the Fed were to increase the money supply at the same time the government was increasing taxes, we could expect

a decrease in interest rates but the effect on real GDP is indeterminant.

49. Under what conditions will the inflationary impact of an expansionary monetary policy be the largest?

When equilibrium real GDP is at potential real GDP.

50. After the attacks of September 11, 2001, the proper policy response was

expansionary monetary and fiscal policy.

51. Which of the following is the formula for velocity?

Velocity = nominal GDP/M

52. Which is likely to be larger, the velocity of M1 or M2?

M1, because M2 is a larger number.

53. A look at the historical data indicates that velocity for M1

has been more variable than the velocity for M2, but both have been fairly constant for the past 65 years.

54. The quantity theory of money assumes that

changes in velocity are so small that velocity can be considered constant.

55. If credit cards were suddenly ruled illegal and were no longer used, the most likely effect would be a decrease in the

velocity of circulation.

56. As the price level rises, the demand for money

increases because more money is needed for each transaction.

57. The principal factor determining velocity is the

frequency with which paychecks are distributed.

58. If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely happen to the velocity of circulation?

It will increase.

59. When comparing the Keynesian and monetarist approaches, the only substantive difference is that

the Keynesian equation leads to a prediction of real GDP; the monetarist equation leads to a prediction of nominal GDP.

60. The major limitation of both the Keynesian approach and the monetarist approach is that both

are ways of studying the aggregate demand curve, but to learn anything about the price level and output, the aggregate supply curve must be i

61. According to the simple quantity theory of money, a change in the money supply of 9.6 percent would lead to a

63. For Keynesian economists to incorporate monetary policy into their models, they must know

how the money supply affects interest rates.

64. Which of the following is the Keynesian view of the sequence of cause and effect of monetary policy?

M, r, I, Y

65. It is often reported by financial news reports that higher interest rates reduce automobile sales. If this is true, we can expect

monetary policy to be more effective.

66. A major advantage of monetary policy over fiscal policy is that monetary

policy can be put into effect more quickly.

67. The optimal time for the implementation of contractionary fiscal policy would be

before inflation accelerated.

68. One of the problems with fixed targets for the money supply is that

demand for money does not grow smoothly and predictably.

69. If the Fed decides to target money supply growth, it must be prepared to accept

interest rate volatility.

70. Figure 1 shows the equilibrium interest rate and the money stock (M) before the demand for money shifted to M1D1. If the Fed wants to return to the original equilibrium position (E), it should

It is impossible for the Fed to restore the original equilibrium condition.

71. In Figure 1, if the Fed wants to target the money supply at $830 billion, and the money demand curve shifts to M1D1, the interest rate will have to

rise above 11 percent.

72. In Figure 1 if the Fed wants to stabilize interest rates at 9 percent, and the money demand curve shifts to M1D1, the money supply will have to rise

above $840 billion.

73. If the aggregate supply curve is flat,

expansionary fiscal or monetary policy will buy large gains in real output at low cost in terms of inflation.

74. Many economists maintain that

the aggregate supply curve is nearly horizontal at low levels of real GDP,the aggregate supply curve is nearly vertical at very high levels of real GDP, any change in aggregate demand will have most of its effect on output when economic activity is low but on prices when

75. An expansionary monetary policy is most likely to produce an inflationary effect with little impact on output when the economy

is near full employment and the aggregate supply curve is vertical.

76. When will stabilization policy be most effective in combating recessions?

when AS is flat

77. What role does ideology play in the debate on stabilization?

A large role, because there are conservative and liberal economists.

78. The Fed's quick response to the threat to the economy after September 11, 2001, makes a strong case for

a discretionary-based monetary policy regime.

79. After September 11, 2001, both Republicans and Democrats agreed on the need for some type of

stimulus package to counteract recession.

80. To maintain a balanced budget during the sag in personal spending in 2000-2001 could cause a(n)

decrease in aggregate demand and a recession.

81. If the U.S. government decided to pay off the national debt by creating money in a few years, what would be the most likely effect?

rapid inflation

82. The government should not attempt to balance the budget if

the economy is in a recessionary gap.actual GDP is below full-employment GDP.unemployment is rising.

83. If the economy is in an inflationary gap, and the government attempts to balance the budget, the effect will be to

continue inflationary pressures.

84. If the president and Congress agree to balance the budget during a recession, then the appropriate monetary policy is

increase the growth of the money supply.

85. If in fiscal year 2001, the federal government receives $1,990 billion in revenues and spends $1,875 billion for goods and services, the national debt will

decrease by $115 billion.

86. Compared to the size of GDP in 2004, the national debt was approximately

one-third as large.

87. A chart of the ratio of national debt to GDP from 1915 to 2001 would show

significant increases from 1980 to 1995.

88. The net national debt is smaller than the gross national debt because

some debt is held by government agencies.

89. With no change in fiscal policy, the budget

deficit will rise during a recession and fall during a boom.

90. A recessionary gap causes national debt to increase because

income tax receipts drop off markedly.

91. If the inflation rate falls, what will happen to the budget deficit?

It will fall, because interest payments will fall.

92. The U.S. government need never default on its debt because

it can raise the funds it needs to repay by taxation, and it can print money to repay.

93. The policy mix that the Clinton administration sought in early 1993 was a

smaller budget deficit and looser monetary policy.

94. Budget deficits are inflationary when

the economy is at full employment and the aggregate supply curve is vertical.

95. The central bank is said to monetize the deficit when it

purchases the bonds that the government issues.

96. If the Fed is increasing its holdings of government bonds at the same time the federal deficit is increasing,

the debt is being monetized.

97. The decisions on the part of the government to increase spending by $5 billion will have the largest impact on aggregate demand when the spending is financed by the sale of bonds to

the Fed.

98. Why might the Fed decide to monetize the deficit?

to keep interest rates low

99. Crowding out can best be defined as:

government deficits increase interest rates and decrease investment.

100. Economists who argue in favor of rapid deficit reduction claim that deficit reduction will

reduce crowding out, increase investment, and increase AS.

101. In the late 1990s, the more than expected increases in tax revenues were the result of

rapid economic growth.

102. The economy's self-correcting mechanism to eliminate a recessionary gap relies on

falling wage rates that shift the aggregate supply curve outward.

103. Demand-side inflation differs from supply-side inflation in the following way: